Government Security Instruments including Government Bills Notes Bonds Debt Auction
In seeking to pay the lowest possible interest rate, the government sells its marketable securities at auctions con¬ducted through Federal Reserve Banks and their branches. Since auctions of T-bills, T-notes, and T-bonds are similar, let’s look at the most frequent Treasury borrowing—the weekly auctions of 3 and 6-month T-bills.
Buyers of T-bills (lenders to the government) range from large financial institutions and government securities dealers to individuals seeking a safe investment. To accommodate these different types of buyers, the Treasury permits two kinds of bids, or offers to purchase, called competitive and non¬competitive tenders.
The United States Government is not constrained by interest rates. When the government needs to borrow more, it can push up interest rates, while taking a larger and larger portion of available investment funds, everything else being equal. When the government is borrowing heavily, private industries are forced to offer securities at a higher rate of interest in order to attract investors. This means higher costs to build new plants, buy new equipment, and develop new technologies
All T-bills, notes, and bonds are held in book-entry form, meaning ownership is recorded on a computerized ledger, with the buyers receiving a receipt rather than a certificate as evidence of the purchase. This method protects buyers against loss, theft, and counterfeiting. Securities can be electronically maintained in a book-entry account at commercial banks or other financial institutions, or in TREASURY DIRECT, the Treasury’s book-entry system. TREASURY DIRECT is offered through Federal Reserve Banks and their branches.
Another concern with the debt is that the government’s heavy demand on available funds can create pressures on the Federal Reserve to reduce interest rates by increasing the money supply. Because the Federal Reserve expands the money supply by pur¬chasing government debt securities in the open or secondary market, the process is referred to as “monetizing the debt.”
Excerpts from Public Debt: Private Asset, published by the Federal Reserve Bank of Chicago, January, 1999.